Dividends are considered a potentially affected transaction by SARS

I was reading the “How to complete and submit your country by country information” external guide published by SARS and came across the below.

For the purposes of calculating the value of a taxpayer’s annual aggregate (potentially affected transactions):

    • One should include dividends paid / received, the coupon paid / received on preference shares and finance charges flowing from any transaction, operation, scheme, agreement or understanding, directly or indirectly entered into or effected between or for the benefit of either or both a person that is a resident; and any other person that is not a resident.
    • It will exclude any transaction, operation, scheme, agreement or understanding contemplated in section 31(5), (6) or (7) of the Income Tax Act”

I am not sure if you were aware that dividends paid or received should be part of the total  aggregate amount? As you know, if the aggregate of a person’s potentially affected transactions for the year of assessment, without offsetting any potentially affected transactions against one another, exceeds or is reasonably expected to exceed R100 million, you will have to submit your master file and local file.

There have been other discussions around whether the capital balance of a loan (or preference shares) should be part of this determination as well? I think the argument that a company’s debt capacity must be arm’s length and therefore could be seen to be a potentially affected transaction carries a lot of weight as well. I wonder how far this argument could go with share capital?

As you can see from the above, and SARS’s external guide the threshold is met rather quickly and now even quicker. Also keep in mind the threshold refers to reasonably expected to exceed, which makes this even more grey.

Let me know your thoughts on this and what your view is. Especially around the loan balances and now potentially share capital balances.

12 Replies to “Dividends are considered a potentially affected transaction by SARS”

  1. A few readers asked me privately if it really refers to dividends including dividends of ordinary shares or similar. In short, it does. Part of the reason for this is that it covers potential hybrid transactions which otherwise may not be picked up, another reason is that it it would be too difficult to scope in and out certain transactions from potentially affected transactions.

    What are your thoughts?

  2. One must consider what the revenue authorities are trying to achieve with the information gathering and on that basis determine which amounts need to be included.

    1. Thanks Tania, I just want to caution, the determination of the threshold is quite factual (ignoring certain interpretation for now), having said that, once the threshold is met to support transactions such as inbound interest free loans or ordinary dividends, from an arm’s length perspective, can be short and sweet.

  3. Hi Marcus. My understanding, prior to reading this piece, was that only dividends on certain preference shares would be included in aggregate potentially affected transactions if the underlying nature of the preference share was debt rather than equity in nature. Interested to hear your thoughts on this?

    1. Thanks for your thoughts Craig. I think in short your sentiment is shared by many and it hinges on the fact that, whats the point/reason for including normal dividends. When looking closer at the wording of potentially affected transactions you will notice that no transaction has been specifically excluded. Or in other words, even “normal” dividends are caught by this definition.

      Maybe to reverse your question Craig, how would you specifically exclude dividends from the potentially affected transaction definition, without using the no tax benefit part as this only comes in later on.

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